As the Grateful Dead once sang, “What a long strange trip it’s been.”
It won’t be long before 2003 will enter into its rightful place in the annals of automotive history. It was a year that saw both natural and man-made disasters, from the tornado that hit GM’s Oklahoma truck plant to the blackout that left the entire northeastern U.S. powerless.
It was a UAW contract year, with negotiations that were, as one analyst put it, “kind of scary,” with the union and Big 3 coming to a very quiet and uneventful agreement. While 2003 had its share of excitement, auto analysts say that what will make 2003 important is that it sets the stage for the future of the domestic Big 3 as they dig in, trying to find a way to stop their market share erosion.
Automotive Industries sat down with industry analysts to get a glimpse of what’s to come in the short term. Will 2004 be equally as interesting as 2003 was?
Analysts predict another strong production year, with North America looking at 16.5 to 17 million units, spurred on by less economic uncertainty on the consumer side and an increase in merchandise as both domestic and transplant OEMs add new models to their lineups.
Dave Andrea, director, forecasting group for the Center for Automotive Research, says that it’s always hard to predict a softening of sales or production in an election year. “I think there’s only been one or two in history where an election year has given you softer auto sales,” Andrea says.
Incentives will again play a major roll in 2004 as the Big 3 fight to control market share. Michael Robinet, vice president, global forecasting services for CSM WorldWide, sees incentives heating up in certain areas, like full-size pickups. He says that both DaimlerChrysler and General Motors will be under a lot of pressure from Ford Motor Company and Nissan who are both coming to market with new full-size pickups.
“It will be a shifting pattern,” Robinet says. “Incentives will be shifting to some of the more profitable areas. So it may have a more negative effect on the OEMs in some cases.”
But as much as incentives are good for driving sales and increasing market share, the North American OEMs would love to find a way to back off slightly from the record incentives that they paid out in 2003. The analysts say that manufacturers may test the market in 2004, hoping that they can sell new product without giving too much away.
“What we have seen this year with some of the new products,” says Joe Barker, manager, North American Sales Analysis for CSM WorldWide, “is that no matter how good the products, the traditional Big 3 tend to rely on incentives to drive the volume.”
“Our expectations for incentives are certainly not to decline,” says Jeffrey Schuster, senior director, forecasting for J. D. Power, “but likely to continue to grow, probably through next year.” But Schuster wonders how long the pace can and will continue.
“If those record high levels are maintained you’re not going to get that type of bump — that consumer response that you get — that affects the sales numbers,” says Schuster. “So we see them growing but probably not at the pace that we’ve seen over the last couple of years.” For the domestic Big 3, 2004 will be another year of market share decline, seeing their market share dip below 60 percent for the first time. “There is some significance there,” Schuster says, “but we do see that trend slowing.”
Schuster says that the pure volume of the new Ford F-150 will help slow the decline. “Even if it doesn’t achieve everything that it’s expected to do from a Ford standpoint, it’s still a volume product so it’s going to drive some of that activity.” CSM’s Barker says that the Japanese and the Koreans, which have a great product balance, are making inroads in the truck market and continue to maintain a very strong car portfolio. Barker adds that while the Big 3 are coming to market with some new product, “We don’t see too many conquest sales and that’s how they’re going to gain market share.” Schuster says that a rash of new competitive product from the Big 3 coming out later next year and into the ’05, ’06 and ’07 time frame will help flatten the decline.
“That doesn’t mean that Honda, Toyota and Nissan will stand still,” Schuster says, “but the increase in product from the Big 3 makes it difficult for Toyota to continue to grow at the pace they have been.”
Dave Andrea says that inventory will be one area that everyone’s going to be watching closely in 2004. He feels that the Big 3 industry standard 60-days’ supply is too high. “That’s too much finished product out there,” he says.
Robinet feels that inventory is probably not going to change too much. He says that as the Japanese move into the truck sectors, especially full-size pickups, they’ll need to carry extra inventory to cater to buyers who expect to have plenty of different model variations to choose from. “That’s why we think that, even though people have been saying for years that inventory is going to draw down,” Robinet says, “there are some areas of the market where inventory will draw down, but we think its going to actually expand in some other areas.”
Andrea believes that domestic imports will continue to keep tight inventories all around although he feels they may actually start to rise as more production capacity comes on line in North America and as they broaden their product line-up.
“It’s going to be that much more competitive for them in both passenger car and light trucks,” he says.
Schuster agrees that the domestic Japanese may see a slight increase in inventory. “Speaking more in terms of a day’s supply they still are well below the average of the Big 3, because they’re essentially running at or near capacity. However, as competition increases, the likelihood of them creeping that up a bit is there.” Schuster feels that the 2004 inventory story will be told at the end of 2003. He says that a lot will depend on how the manufacturers manage their inventory in the fourth quarter of this year. If a strong sales pace continues through the end of the year and the OEMs continue to take inventory out of the system then Schuster sees them starting out 2004 with a lower than expected inventory level.
SUVs will continue to be the hot segment in 2004 if, as Schuster says, you use the broad definition of SUV. Schuster says that the traditional SUV will continue to be strong in 2004, but as the segment divides into several sub-sectors under the umbrella ‘Crossover Utility Vehicle’ Schuster sees the continued transition from the traditional body-on-frame vehicles to the unibody versions. The others agree that the crossover segment (sport wagons and tall wagons) will continue to grow in popularity next year.
“The Japanese are going to expand their presence,” says Barker. “The big 3 are arriving late but are arriving, so those segments certainly will grow next year and years to follow.” The experts also see growth in the full-size pickup segment next year due mainly to competition between Ford, with a new F-150 and the Nissan Titan.
“We’ll see some growth in the full-size pickup segment just in terms of volume,” says Schuster. “But beyond next year we don’t see a continued growth pattern in that segment. It’s product driven growth next year.” Barker says that virtually every segment is going to see growth in the premium or luxury end of that segment. Baby boomers are leading the tremendous demand for luxury products and many Gen-Xers who are now in their late 30s and early 40s are entering the luxury car and truck market as well.
And interestingly, the minivan is making a comeback. 2003 brought new products from Toyota and Nissan and 2004 will see new product from Ford, Honda, Chrysler and GM.
According to industry analysts, 2004 will also tap into some new segments. Barker says that the eyes of the industry will all be on Honda’s lifestyle, unibody pickup. If it takes off and the other manufacturers see Honda bringing women and families into pickups, they’ll all come to market with a similar product. Barker also sees a change in body styles creating some niche segments.
“We’ll see more hatchbacks in the small car segment,” Barker says. “Not only hatchbacks but some other body styles that we don’t see today. Basically OEMs are going to be expanding their body style offerings to broaden the appeal of their products and to bring some customers to the passenger car side.”
Andrea says that, while it’s not a segment, interiors have come a long way for the domestics over the last five or six years.
“I still think it’s that driver-vehicle interface that needs a lot more attention,” he says.
Vehicle content will continue to increase in 2004, due primarily to the required regulated content like tire pressure monitoring systems and occupant-sensing seats. As the cost of navigation systems comes down, we’ll see them moving into more high volume segments, and DVD entertainment systems are still a popular option. Andrea sees the pieces of the true plug-andplay vehicle starting to come together in 2004. “It will be interesting to see the acceptance of Chrysler pushing Bluetooth technology,” Andrea says, “because it gets it out of the vehicle architecture. An enabler would be a platform to get to the next level of consumer electronics in the vehicle.”
Robinet says that integration is the key word on electronic content.
“You’re going to have new electrical architectures that are going to drive the ability to integrate electronic content, and not only electronic content behind the IP but also usable electronic content, technology that customers can use on a regular basis.”
Robinet says that there was a concern that vehicle manufacturers were running out of power to run all of these systems.
“I think power distribution is going to become much more efficient,” Robinet says. “The fact that we haven’t had to go to electrically- lit catalytic converters has also helped the fact that now there’s a little more juice to go around.”
Schuster says that content will continue to increase in the higher ends of all segments, but that much of that content may be optional instead of standard.
“Certainly the spread between where the base model is and where you can top a model out will probably increase as well,” Schuster says.
Who does the best job of listening to their customers? The Japanese are always the first to come to mind.
“That’s why the Honda’s and the Toyota’s of the world are continuously in the forefront of the next best thing,” says Barker. “With Japanese vehicles you tend to see the little things that make a big difference,” Barker says. “I think that some of that comes from customer feedback. The Toyota Sienna is all about listening to the customer.”
Andrea says that Honda is the one that immediately comes to mind.
“They are the most sensitive to external input — everything from J.D. Power surveys to the Harbour Productivity Report.” “Interestingly, everybody would talk Japanese here,” Robinet says, “but I actually think that GM has made a lot of strides in this area, especially if you look at Cadillac. Cadillac had a lot of issues but I think they listened to their customers in terms of content and in terms of what the real issues were with their vehicles.”
“As we go forward, powertrain, engines and transmissions are going to play a bigger role,” says Barker. “With brand equity suffering right now at virtually every Big 3 brand, powertrain is one area that can help change the image of a brand.” Barker says that the engine is the heart and soul of every automobile and without it you’re not going to be successful.
“Cadillac is really moving in the right direction,” he says, “not only with the products but with the powertrain.”
“If you look at the Japanese,” Robinet says, “they all have very strong V-6 engine families and look how well it’s serving them now.” Andrea brings up an interesting trend in Chevrolet’s SSR. The vehicle, designed and engineered by GM will be essentially built by outside supplier ASC.
“If ASC can deliver and if GM can be consistent in terms of using an outside vendor and building a business case there, then that may be interesting to watch,” Andrea says. “They all talk about niche vehicles and flexibility and all of that but really, except for ASC here in the states we don’t have that here like they do in Europe.”
A recent example was DaimlerChrysler’s decision to cancel plans to build the Mercedesthey couldn’t justify the volume. If the U.S. market had a Pinninfarina or Karmann that could produce 50,000 units, then DaimlerChrysler could have at least got production going here and if an increase in volumes justified a 100,000 to 150,000 plant, they could build it and pull production back in.
“But that doesn’t seem to exist here,” Andrea says.
2004 and the UAW
There are feelings throughout the industry that the new UAW contract didn’t go far enough in helping the Big 3 become more competitive. Andrea points out that everything can’t be done in one contract. “I would see it as a real transition,” Andrea says. Robinet says that while the new contract may help them in the shorter term, with some easing on the pension and wage side, he thinks that in the longer term they didn’t help themselves enough — especially in the areas of production capacity and healthcare. “Those two areas are certainly going to continue to be the Big 3 Achilles heel,” Robinet says. “We’re very worried that Ford did not make enough movement in this latest contract to shed some capacity.” Schuster says that ’04 might be a little early to see the full effect of the contract. “It does set the stage for them to be more competitive,” he says, from the flexibility standpoint of being allowed to close plants and restructure things.”
But Schuster wonders if the Big 3 pushed the union hard enough.
“It was real quiet, the unions cooperated almost too much,” Schuster says. “That suggests that they were prepared to go to a certain level and it sounds like, without being inside the room, that maybe the manufacturers didn’t push beyond that level. So they may have been able to get a little more out of the deal.” Schuster says that as we start into the new year and see some of the restructuring going on, we’ll get a better idea of how well the Big 3 will do in the marketplace.
“I think the stage is set to be more competitive,” he says.
Schuster feels that the union realized what ued tough competition from the Japanese and Europeans and with the Koreans building plants here the alarms went off. “I think they’re finally starting to get it,” Schuster says. “Not only hearing it from the Big They don’t want to be extinct 10 years down the road so they realize now may be the time, while they still have some market presence left.”
Schuster finds it ironic that the UAW is still when they essentially sold out the future workers — settling for a two-tiered wage system and decreased benefits for new employees. “Though they’re trying to expand and grow their presence, they’re not really helping out the more junior members of their union,” Schuster says.
It looks as though 2004 is going to be another tough year for the supply chain in North America. As the industry continues to grow globally, more and more suppliers are looking at moving operations out of the country to places like China, India and Mexico.
“There’s no doubt that supply chain is going to be under continued pressure,” says Robinet. “The Big 3 are under market share pressure, the supply base is going to be under pressure — pressure to deliver better products closer to production time, but there’s certainly an indication that the supply base is pushing back as well.” J. D. Power’s 2003 prediction that 25 to 30 mid-size Tier 2 suppliers were going to be purchased, merge with larger corporations or go bust came true. Upham believes that the same will hold true for next year. He also predicts that we’ll see a couple of Tier 1s merging in 2004, though Robinet is not convinced that Arvin Meritor’s bid on Dana is going to spark off a major wave of first Tier consolidation Upham says that the trend will continue during the next year, though he doesn’t see it slowing down or speeding up.
“The only thing that could pick up the pace,” Upham says, “is if the economy comes back strong. If you look at the cycle of how these things run, when the economy is just starting to come back, that’s when they do it.” “There are many examples of the winnowing out of suppliers into the Darwinian model of the survival of the fittest,” says Upham, “and the carmakers like it to a certain extent.” Upham says that the industry would love to see consolidation progress to where there’s six or seven big suppliers in any given component area, “but they don’t want it going below that because that actually cuts into their leverage as far as being able to pit supplier A against supplier B.” Upham says that DaimlerChrysler has been encouraging a lot of German and European suppliers to set up shop here.
“Same thing with the Koreans,” Upham adds. “Hyundai is encouraging its Korean supply chain to set up plants surrounding its new facility, much like the Japanese did when they came over in the ’80s.”
“It’s almost like there’s this dichotomy,” says Andrea, “where the suppliers that are on the new program launches or the truck models are doing well and will continue to do well. “Look at what Delphi’s doing in terms of what products they want to get out from under in the automotive holdings group,” Andrea says. “J.T Battenberg is very clear that his top line may not grow because of that shift in the overall customer product base but if it’s a better quality of customer and a better quality of product, his cash flow improves.”
Upham says that China has become the number one issue for suppliers. They all feel like they need to have a presence there and many are scrambling to get into the market. The concern for all is that this global sourcing will set a world price for components, making it very hard for North American suppliers to compete. “A lot of suppliers are moving production to Mexico just as you’re seeing a shift from Western Europe to Eastern Europe, in droves,” Upham says.
Dave Andrea cautions that suppliers who will be successful in China are ones that put new capacity in very strategically. “That’s capacity that’s targeted at the right customers,” Andrea says. “It’s also capacity that’s targeted in areas where they can export out of the country.”
Andrea says that if these companies are just following low cost labor around the world, then they are setting themselves up for failure in the long term.
“There’s just so much auto investment in China,” he continues. “There’s pricing pressures — negative pricing that’s already starting to occur there.”
As the Grateful Dead once sang, “What a long strange trip it’s been.”