Auto Market Seems To Be Uneven

November 1, 2004
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GRAND RAPIDS — Vehicle sales and production have grown in all the world markets, with most of the growth driven by the Chinese market.

Some 56 million vehicles were produced globally in 2003 and production is projected to rise to nearly 68 million by 2009, according to Jim Gillette, director of supplier analysis for CSM Worldwide.

The outlook for the North American market remains positive, with the New Domestic OEMs — Honda, Renault/Nissan, and Toyota — exerting more influence and gaining more ground.

The United States and Western Europe auto markets are growing at a slightly slower pace compared with the low-cost emerging markets of the world, and global production will continue to shift toward the lower-cost, higher-growth markets, Gillette told a group of business people at a recent National City “Lunch and Learn” event at Cascade Hills Country Club.

The U.S. auto industry is facing an uphill battle for a number of reasons, including globalization, significant change in customer demand, excess capacity, commodity price turmoil and financial market disruption.

General Motors is doing a lot better and has seen a 2 percent compounded annual growth rate. Ford is growing a little, but its growth is hampered by United Auto Workers’ negotiations and excess capacity in North America, Gillette said.

Being big doesn’t necessarily mean a company is going to be profitable. These days it’s the small- and medium-sized companies that are reaping profits, as companies like Honda, BMW and Porsche have proven, he said.

“As everybody in West Michigan is aware of, the North American auto industry is moving toward the South. The idea is to figure out how you can manage your business so you can supply all the assembly plants popping up in the southern states. In some cases, suppliers will have to have a southern plant.”

According to Gillette, how an auto company is going to fare in the future has a lot to do with where the company locates its production facilities. Those that concentrate production in lower-cost, high-growth markets could have an advantage.

“The amount of production that each one of these companies is accomplishing, or will accomplish by 2009, is in the low-cost regions of the world.”

It’s forecast that by 2009 about 39 percent of GM’s overall production will be occurring in low cost locations. By that time Hyundai is expected to have 95 percent of its overall production concentrated in low-cost markets, while DaimlerChrysler is expected to have 13 percent and Ford 25 percent of their overall production occurring in low-cost markets, Gillette said.

China is a significant force in the global auto industry and it’s predicted that by 2011 that country will be the largest auto producer in the world.

“I know a large number of West Michigan firms have been exploring the possibility of setting up some operations over there,” Gillette remarked. “What you have to ask is whether there is something you can do profitably in China. Are there investments you can make in China to ensure you’ll be able to ride the crest of this growing vehicle production? Is China too foreign for you, or are there really some opportunities you can exploit?”

There are common platforms suppliers can target to increase their volume. The concept behind common platforms is to “commonize” as many vehicle components as possible to achieve economies of scale in design, manufacturing, testing and everything else, he explained. High volume vehicle platforms, for instance, produce more than 1 million units.

The use of global platforms is on the rise because they allow companies to leverage differentiated offerings and satisfy varied market demands, Gillette pointed out.

“The largest platform in the world had over 5 or 6 million vehicles roll off it. So if you have a component that can be communized to that vehicle, that’s a lot of parts for you. But to get in on these platforms, suppliers have to have a presence outside the U.S.

“Am I advocating that suppliers become international and go outside the U.S.? No. What I’m saying is that the lack of a presence could be an impediment to getting in on some of these larger programs.”

In 2003 the North American market represented 28 percent of total global vehicle production. In 2009 it’s expected to represent about 25 percent. The growth is in and will continue to be in the New Domestics, and they’re taking a larger and larger piece of the pie, he said.

“The public just likes the New Domestics’ products better.”

Gillette said the Big Three are stuck with excess plant capacity and need to get rid of a few plants. He predicts they will continue to lose ground and that their market share will fall to 52 percent by 2009.

There are a bevy of new models hitting the marketplace, many of them coming out of Toyota and Honda. The fact that they’re pumping out new product is a key competitive advantage, according to Gillette.

What’s the next “big thing?” As he sees it, it’s pretty clear that compact sports vehicles will continue to proliferate.

Generation Y will reshape the market, and production in the smaller mini-car and minivan segments will expand as OEMs attempt to lure that generation of buyers, he said. That set of buyers — people born between 1977 and 1995 — want something else, which will create huge opportunities for automakers and suppliers, he said.

“North American volume sales in the compact to mid-size car segment is shrinking, so if you’re targeting that market with your components, you’re looking at a constant downward struggle.”

Gillette encouraged suppliers to add the kind of “intellectual property” content that consumers are going to demand and to diversify their customer base so they’re not overly focused on one customer.

“This is a really tough business to be in. You’ve got to position correctly in order to make money.”       

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