2005 Industry Forecast

Though Ford and General Motors have scaled back vehicle production in the last quarter of 2004 to reduce some overcapacity, 2005 should produce sales volumes near or even a little bit higher than 2004. Strong sales predicted for the fourth quarter of 2004 should bring the final number near 16.8 million vehicles. Analysts are looking at a one to one-and-a-half percent increase in 2005.

“We’ll see some pull ahead and because of that we’re expecting the first quarter of ’05 to be a struggle,” says Joe Barker, manager, North American sales analysis at CSM Worldwide. “But after the first quarter, we’re expecting the balance of the year to be a pretty good year.”

The sales increase in 2005 will be fueled, not only by a strong fourth quarter in 2004, but also by a glut of new product coming to North American showrooms, as well as additional capacity from new manufacturing plants from Toyota in Texas and Hyundai in Alabama.

Pete Langlois of the Ernst & Young Center for Business Knowledge is a little less optimistic about sales for 2005. He says that while all the new product coming for ’05 should help push sales up near the 17 million level, he’s concerned that while the U.S. economy showed greater GNP growth over the course of 2004 than it did in 2003, that auto sales remained flat even though the manufacturers were doling out record incentives. “That worries me in the sense that we had great economic growth, we threw more money at people and yet we still, at best, are matching the sales level,” Langlois says.

Langlois feels that the automakers are not seeing any sales growth because the strong growth in GNP hasn’t translated into wage growth. “I’m optimistic about next year,” Langlois adds, “but until I see the wage growth improve, then sales will probably drop a little bit, to about 16.5.”

Market Share

The Domestic Big 3 can expect a further erosion of its market share in 2005 due largely to the increased capacity from the new domestics. “The next year we’re projecting GM to be down to about 27 percent,” Barker says. “That’s down from 27.8 to 27.9 for this year.” Aside from the added new domestic capacity, Barker credits GM’s drop in market share to the fewer number of new products, compared to the other domestic manufacturers.

“And you’ve got (Chevy) Aveo underneath,” says Michael Robinet, vice president, global forecasting services for CSM. “Cavalier cut a pretty wide swath. I think you’re looking at slimming it up a bit.”

“Also, you have to factor in that Oldsmobile is going away,” Barker adds. “GM had Oldsmobile sales for a good portion of this year. They’re going to lose that.”

The new Chevrolet Cobalt, replacing the Cavalier in 2005 will not be the same high volume car that Cavalier was for GM because of an increasingly competitive small car market. CSM is expecting a nominal decline for Ford Motor Company at 21.2 percent of the market, down about 0.7 percent from 2004. This may seem depressing for a company who’s launching a new flagship sedan in the Ford Five Hundred as well as a new Freestyle crossover. “Nice vehicles,” Langlois says, “yet people aren’t terribly excited about them.”

DaimlerChrysler is predicted to post market share at 14.2 percent, down 0.3 percent from 2004. Strong sales of the new Chrysler 300 sedan actually pushed market share up in 2004 and the company is hoping that the excitement can continue with the release of the Charger in 2005. Langlois also points out that while Dodge’s truck fleet is aging, it’s still putting up some good sales numbers.

On the transplant side, 2005 could prove to be a down year for Toyota, coming off of a stellar year led by a new Sienna minivan and increased production of the RX330 SUV in North America. But with a lack of new product in the pipeline for 2005, the experts are expecting things to slow down for the mighty Japanese import. Barker expects market share in 2005 to be around 12.3 percent, down form 12.9 percent in 2004.

Langlois agrees. “Toyota’s had a good year but it’s not been coming necessarily from those bread and butter Corolla and Camry products,” Langlois says. “So if sales are going to drop a little bit and the domestics are going to gain, then that’s the place they’re going to take it out of.” Honda will have a new Odyssey minivan for 2005 that will really push the envelope in volume, according to Barker. Along with that and the new Fit small car, Barker sees Honda’s share jumping from 8.3 percent in 2004 to 8.7 percent in 2005.

“Honda is certainly looking for a halo effect from the Accord hybrid,” says Langlois. “And I guess the other exciting thing from them is the small pickup. I’m not terribly sold on how well that’s going to do. I don’t know how it draws a lot more people to the Honda brand that weren’t already there.” ”Nissan sales are up this year in North America by 34 percent through August,” says Jeff Brodoski, manager North American forecasting for J.D. Power. “And that’s because of its new vehicles, the Titan, QX56 and Armada as well as added capacity of Altima (in Canton).”

But even with three new trucks, the Frontier, Pathfinder and Xterra coming in 2005, CSM predicts a meager 0.1 percent increase from 5.7 percent in 2004 to around 5.8 percent next year.

Hyundai could be the success story for 2005. While CSM is only predicting a 0.2 percent increase in market share, there are great things coming from the Korean import.

“I think you’ll find that the new Sonata and Santa Fe are going to be absolute home runs,” says Robinet. “With Sonata, I would not be surprised if we saw another Altima-esuqe type rise.”

 

Segments

2005 will see continued growth in the light truck segment, especially in CUVs, crossovers and tall wagons. Growth is also expected in the compact market as more hatchback vehicles are launched. The excitement generated by the Pontiac Solstice may start a renaissance of the sporty car market. “It’s not a high-volume car,” Brodoski says, “but it’s gathering a lot of attention as being a marketing vehicle for Pontiac.”

Brodoski also sees potential growth in the mid-size car market with new product coming from Ford, DCX and GM.

On the down side, Mike Jackson, manager, North American forecasting for CSM sees a decline in full-frame mid-size sport utilities as more customers move to crossovers or unibody-based trucks. “Ultimately,” says Jackson, “consumers want the ride and handling experience of a passenger car to carry over into a light truck.” Brodoski says that some segments will look like they are declining when 2005 sales are compared to 2004.

Langlois points out that sales of ultra-big SUVs, like Hummer and Suburban, seem to be slowing down.

“The question that other people have asked me is, ‘are we finally seeing the effect of high gas prices on these things?’” Langlois says. “Theoretically, the people who are buying those are not going to be as affected by the jump in gas prices. I would see a little more decline in those huge SUVs but I’m not terribly sure why yet. Hummer sales have been down all year and that just leads you to think that it was just fashion and it’s gone out of style.”

Transaction Prices

Consumers can expect to pay more for their vehicles in 2005 as the baby boomers continue to drive the premium car market. Rising steel and oil prices will also affect the cost of vehicles as it costs manufacturers more to build them.

“There are some indications that for class A sheet steel you’re looking at increases of 7 to 10 percent — in some cases up to 15 percent increases,” says Robinet.

“I think the general trend will probably continue from where we are right now,” says Jeffery W. Schuster, executive director global forecasting for J.D. Power, “where the overall rebate or incentive will continue to grow but the consumer will continue to use that as a way to buy more vehicle.” Consumers can, and will, still expect rebates and incentives when they come in to buy new vehicles. But the record incentives of 2004 seem to be a thing of the past according to industry analysts. “This year incentives are up 14 percent,” says Barker. “We don’t expect incentives to grow at that rate next year. But we do expect them to climb over next year more modestly.”

Barker adds that a resurgence in leasing will help the OEMs back off on high rebates and long-term 0 percent interest loans. “I think that this is finally the year, that while they may not drop,” says Langlois, “they won’t increase, just on the fact that the cost of money is higher for Ford and GM. And I think they have enough new products to at least hold on to domestic market share without needing to jack them up any further.”

“This is GM’s game,” says Schuster. “GM’s leading it. It’s really what GM wants to do. So if they go on a market share crusade in ’05, we’ll see incentives rise.”

Trends

Hybrids are still making headlines and will continue to do so in 2005 as more models come out to help meet a growing demand. Lexus will finally launch the RX400h hybrid premium sport utility with a Highlander hybrid following later in the year. Honda will have a hybrid Accord on sale by the end of 2004. Even with the additional capacity, the hybrid market still counts for only about 1 percent of total vehicle sales in North America.

Anthony Pratt senior manager Global Powertrain for J.D. Power, says that going beyond 2005, hybrid sales are expected to hit 400,000 units by 2008, roughly 2.5 percent of sales, then leveling off between 2.5 and 3 percent. “That’s assuming that gas prices don’t spike above $3.50 a gallon and that government won’t offer large subsidies or tax credits that will help offset the price of hybrid versus non-hybrid,” Pratt says.

And don’t count out the lowly ICE yet. An increased use of cylinder deactivation in both V-6 and V-8 engines will improve fuel economy, as will 6- speed automatic and CVT transmission. Both will see increased use in 2005. With the increased interest in crossover vehicles, Robinet sees a growing popularity for all-wheel-drive systems.

“I think that the OEM or supplier that can learn to bring cost-effective AWD systems to market is really going to be on to something,” Robinet says, “because we’ve seen from manufacturers like Subaru or Audi that there is a demand out there for AWD systems.”

2005 will see more cars equipped with adaptive cruise control and rear detection warning systems, driven by the increased use of radar sensors in the vehicle. Multiple airbags will also be a prominent feature on 2005. Pratt points out that a change to NHTSA’s side impact ruling will most likely make side airbags standard on all vehicles in the future. “I think the vehicle manufacturers know that,” Pratt says, “so they’re beginning to make it available as an option today. And some of them have just made the decision to put them in.”

Vehicle architectures have gone global and that trend will continue as OEMs find ways to reduce costs. Schuster points out that the trend is towards unibody construction.

“What they’re finding is that unibody platforms have a little more flexibility and a little more opportunity than the frame-based ones,” says Schuster.

“We’re seeing some of the architectures get better,” Schuster adds, “The kind of thing you’re going to eventually see is a platform carrying two to four different wheelbase lengths and anywhere from three to six body types.”

Brodoski points out that manufacturers are getting smarter in how to differentiate vehicles on a platform.

“There are certain parts that the customer will never see or notice or even care,” Brodoski says. “Those are the kind of parts you can make common.”

“Common and flexible are the two key words that just tie in with flexible manufacturing,” Schuster adds. “As they (the OEMs) revamp existing facilities or build new ones, they’re building those with that in mind.” Rising steel prices are driving OEMs and suppliers to look for alternative materials.

“The whole steel aluminum thing is pretty interesting,” says Robinet. “I still think that the usual tradeoffs are going to exist because even though steel prices have gone up there’s no real reason to think the difference between aluminum and steel is going to change substantially.”

Langlois adds that nobody’s figured out how to work with aluminum in very high-volume high-mass applications. “And until that happens I don’t think you’re going to see any huge changes coming.”

Schuster points out that the materials that you can see and touch on the interiors of cars are improving every single year. And a lot of manufacturers are using MSC’s Quiet Steel in the quest to create quieter interiors. “They have gone beyond one piece of Quiet Steel and they’re going into actual systems,” Schuster says, “where you have different materials of different sizes and shapes all throughout the car, in key points creating a quieter environment inside.”

Supplier Concerns

Suppliers won’t see any relief from the high cost of production and healthcare. In fact, rising commodity prices will only make things tougher, especially for the small guys. Lindsay Brooke, senior manager, market assessment at CSM sums up the supply chain’s biggest concern in one word … surviving.

“Particularly if you’re a sub tier,” says Brooke. “A lot of these guys have nowhere to hide on cost exposure. They don’t have any technology that they can bury profit in.”

Langlois fears that intellectual property may not be enough to save the Tier 1s as the OEMs feel the necessity to shop around technology to other suppliers in search of the lowest bid.

“You’re worried, literally, about someone saying ‘don’t send us a patented design because we want the ability to talk to others about doing this,’” Langlois says. “That would scare the wits out of me.” China is near the top of Schuster’s list of concerns. “Especially if you’re not in China,” Schuster says. “If you’re not a supplier that has the ability to quote from China, I’d be concerned about that depending on what business you’re in.” Supply chain consolidation will continue in 2005, not at any great rate and more out of necessity than anything else. Higher raw material costs, the commoditization of products and the intense cost pressures from the OEMs and higher tiers will take their toll on the small mom and pop shops.

“Some of the sub tiers who have been privately held family companies,” says Brooke, “they’ve been in business since the end of WWII and the Grandfather has died and the father is ready to retire and he’s saying, ‘I’m getting beat up too much. I can cash this thing in, give my employees a month’s severance and get out of the business.’”

Robinet doesn’t see any new trends in outsourcing, but expects things to remain pretty much the same. While outsourcing has eliminated many jobs in the U.S., it isn’t particularly bad for some companies. “What makes sense to outsource will continue to be outsourced,” Schuster says. “The publicly traded companies are actually awarded on the market with announcements that involve outsourcing to cut costs.”

The Economy

When people talk about the economy and the automotive industry, the conversation inevitably leads to gasoline prices. But 2005 will bring more than just high gasoline prices. The increased prices in oil will also drive up utility prices affecting just about every part of the automotive industry. “The plastics guys are crying right now,” says Robinet. “Those guys are not on steel resale. And if you’re a chrome plater, you’re using metals and those have gone up. Virtually every part of the vehicle has seen some increase in terms of its input prices.”

Robinet also points out that these escalating costs are not just affecting business but consumers as well. And people with higher utility bills have less money to spend on cars. But even that may not have too much effect on 2005 sales.

“Oil above $50 a barrel — we see that as a short-term situation,” says Schuster. “The general consumer has been led to believe that it’s not something that’s going to be ongoing, so as long as it’s not, we don’t see a problem.”

The Election

There is a general consensus among analysts that the results of the 2004 Presidential election won’t result in any major changes to the industry in 2005.

“Bush isn’t going to do anything draconian in terms of fuel-efficiency mandates.” Brooke says. “Kerry won’t be able too either. If the Midwest carries the election for him, he’s locked in.”

Langlois says that the first thing on either candidate’s agenda is the drive for some kind of reform of the healthcare, which has been the topic of many speeches by the top level managers from the Big 3. Langlois thinks that healthcare reform is one thing that the auto industry can be involved in driving. “I think we’re finally getting to the point where business is going to drive that train in coming up with something,” says Langlois. “And to that extent the election will sort of factor into what that strategy is.” Schuster says that the election will remove the uncertainty.

“I think that’s really what’s hit the industry and the economy and the overall consumer confidence level. There are jitters right now, not knowing what the outcome will be,” Schuster says. “There’s that comfort thing where you know who’s in there and you know where they stand regardless if it’s your guy or not.”