Global Bounce Back: Auto Industry in Flux

Even as auto makers migrate to lower-cost regions to cut cost and court growing economies, fear and loathing still stalk the international industry, with sales momentum gained in the year’s first six months now stalling.

Barbara McClellan

October 20, 2010

12 Min Read
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The global auto industry still is sorting through the rubble of the worldwide economic crisis that started in the U.S. in late 2008 and permeated overseas markets throughout much of 2009, driving major car makers toward a renewed focus on emerging markets as consumer confidence loses momentum at home.

But shifting resources away from flailing domestic economies and toward regions with unpredictable political regimes, many armed with protectionist measures, brings a new 4-letter word to executive lips: “Risk.”

While key emerging markets such as China, India and Brazil only were lightly scathed by the financial meltdown, mature regions such as the U.S. and Europe, still are recovering. Japan – already suffering from falling domestic demand – remains flat, and for the first time auto makers there are beginning to build passenger vehicles in other countries to be exported back to their home turf.

In comparison, the Asia/Pacific juggernaut, pumped by vehicle producers in Thailand, Indonesia and Malaysia, continues to gain momentum as more OEMs pour investments into low-cost countries to build cars for both the domestic and export markets. Others regions to notably benefit from this move are China, India and Brazil.

Joseph Greenwell, chairman, Ford of Britain, contends there are some signs of economic growth in Europe. “The consumer is coming back out again. We’re not going to be at the level we were at in the pre-recession era for a little time yet. But there is a gradual recovery.”

However, Renault SA could see vehicle sales outside Europe account for 50% of its total volume by 2013 if current conditions prevail, Chief Operating Officer Patrick Pelata tells the French newspaper Le Figaro in September. As demand for new cars in Europe stalls following the end of government scrappage schemes, auto makers increasingly are looking to booming emerging markets for growth, he says.

Tim Lee, president of international operations for General Motors Co., echoes a similar sentiment, telling Ward’s GMIO accounts for nearly 45% of the auto maker’s annual global light-vehicle sales. That does not include South America, named an independent unit this year, where Brazil is GM’s third-largest world market.

Ford CEO Alan Mulally introduces Figo in India to emphasize market’s importance.

Ford Motor Co. said in June it was investing $450 million in a new plant in Thailand to build the next-generation Ford Focus. The auto maker is looking to purchase up to $800 million in local parts through Thailand’s supplier network. Additionally, Ford’s Australian-designed, next-generation Ranger pickup was launched in September for export to 180 countries outside the U.S.

But even as auto makers migrate their sales and production to lower-cost regions to cut cost and court growing economies, fear and loathing still stalk the international industry, with sales momentum gained in the year’s first six months now stalling.

Risk factors vary among regions, but primary concerns include the end of government incentives, currency fluctuations, political instability, economic uncertainty, stricter fuel-economy and emissions regulations and overcapacity.

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Currency issues have been particularly onerous. The euro has climbed 12% against the dollar since June and is so strong it’s threatening the region’s anemic growth, the European Central Bank warns.

The soaring yen, at ¥85 to the dollar, threatens to dull the competitive edge of Japanese auto makers, sour their sales and profits and force significant changes in what they produce and where. Japan’s ruling party recently unveiled an economic stimulus plan to keep the economy from sinking back into recession.

China’s strong renminbi also refuses to be tamed, prompting U.S. Treasury Secretary Timothy Geithner this month to warn the undervalued currency, which was pegged to the dollar until June, is triggering an international currency war that risks undermining the global recovery.

Ford’s Australian-designed, next-generation Ranger pickup to be exported to 180 countries outside U.S.

Adding to these woes, the International Monetary Fund now expects global growth to slow more sharply than expected in 2011, due in large part to the industrialized nations’ fragile economic recovery.

Mindful of the roadblocks, small fuel-efficient cars are taking on greater importance. Both foreign and domestic auto makers are pushing beyond the big cities of the emerging markets and into the rural interior, where they say considerable growth potential exists.

In China, now the world’s No.1 vehicle market, demand in the next 10 years is expected to come primarily from smaller cities and towns, an official with the State Information Center tells an annual international forum held in Tianjin in September.

Vehicle sales in Tier-1 cities last year, including Beijing and Shanghai, grew 46.6%, compared with prior-year, while Tier-2 and -3 cities saw growth jump as high as 56.5% and 67.7%, respectively, the China Automotive Review reports.

The same industry tact is being taken in India. Competition in the world’s most-populated country is fierce in the small-car segment, which accounts for as much as 79% of demand but is less-profitable than other segments. India’s total light-vehicle sales are expected to hit 2.7 million this year, compared with 2 million year-ago.

Ford, which fell behind after gaining traction in the market seven years ago with its made-for-India Ikon sedan, has launched a concerted effort to catch up, with eight new vehicles based on global platforms on the way in the next five years.

The U.S, auto maker sold more vehicles in India in the first six months of 2010 than for all of 2009, says Joe Hinrichs, Ford group vice president-Asia Pacific and Africa, crediting the all-new compact Figo for much of the demand.

The small car, introduced by Ford CEO Alan Mulally in New Delhi earlier in the year – to put a fine point on India’s importance – sold more than 32,000 units in the first 26 weeks.

“We have big plans for India and for the (Asia/Pacific) region,” Henrichs tells the annual convention of the Society of Indian Automobile Manufacturers in August, noting Ford intends to set up an export hub in India that eventually will supply 50 countries.

Ford’s exports from India, he says, will be more competitive than from China and Japan in view of those countries’ rising costs and fluctuating currencies.

Toyota building Etios small car for Indian market and export.

Despite financial woes at home, GM continues to have a greater presence in emerging markets than Ford and many other global auto makers. It, too, is focused on India, where 50 players still are building capacity.

The auto maker’ strategy to leverage its Indian and Chinese resources already is making headway with the recent introduction in India of the Chinese-designed Chevy Sail. The plan is to build and sell Chinese vehicles in India from GM Shanghai Co. Ltd. and SAIC-GM-Wuling Automobile Ltd. to help the Indian subsidiary become a volume player.

The new entity orchestrating the collaboration, General Motors-SAIC Investment Ltd., started functioning in February. GM and SAIC Motor Corp. Ltd. hold an equal stake and the ownership of General Motors India Ltd. has been transferred to the new company.

New lines of passenger cars and light-commercial vehicles are expected to begin flowing in India by the end of this year. The cars will be sold under the Chevrolet badge, but branding for the Wuling LCVs has not been finalized.

GM says this type of expansion eventually will spread to its operations in other emerging markets, and Brazil already is a beneficiary. The auto maker plans to engineer and produce a small car there to be sold throughout South America.

The vehicle also will be manufactured at the GM Uzbekistan YoAJ joint-venture plant in Asaka, which recently launched production of the Chevy Spark minicar.

The upcoming sedan, the first in a family of new small Chevy-badged cars, will compete with other low-cost brands, such as the Dacia/Renault Logan, Michael Arcamone, GM Daewoo Auto & Technology Co. president and CEO, tells Ward’s. Arcamone also serves on the board of GM-Uzbekistan, which produces several GMDAT vehicles using components from South Korea.

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GM will sell the new sedan in Uzbekistan, Russia and other Commonwealth of Independent States countries, he says. Sales also are being considered in Mexico, South Africa and the Middle East, but there is no plan to build the new models in other Asian countries. Market introduction is expected by 2013 and production could start by 2012.

GM officially has not said the new Baojun brand introduced in August by Shanghai GM in China will be the basis for India’s and Brazil’s new small-car range. But Mark Reuss, GM president of North America earlier this year said the auto maker was moving more toward global architectures that can be finished in regional markets to suit local taste with local content.

GMIO chief Lee says the Brazilian sedan is an example of that strategy. “It’s a perfect fit,” he tells Ward’s. “It is a vehicle engineered in Brazil but off the global small-vehicle (platform) that is originally from the architectural-development team in Korea. It’s perfectly fitted for a lot of different markets. We’re going to be very successful with the product.”

GM appears to be part of an exclusive club when it comes to sourcing engineering from emerging markets. While the key players of Brazil, Russia, India and China, the so-called BRICs, will continue to lead industry sales growth over the next five years, according to the Boston Consulting Group, a separate study by the firm finds the BRICs’ global-engineering role remains a mixed bag.

Of the four countries, India and Brazil are most likely to emerge near term as dominant industry engineering centers due to a multitude of factors, ranging from a strong engineering pool to Russian consumers’ preference for vehicles identical to the West to a lack of efforts by many OEMs to engineer for local buyers’ needs.

Only four companies – GM and Volkswagen AG and suppliers Robert Bosch GmbH and Delphi Automotive LLP – stand out as the best-positioned in the BRICs, with investments in manufacturing, sourcing, engine and sales in all four markets, the report finds.

Another worry for many world markets is overcapacity. Ford of Europe CEO John Fleming tells an industry conference in June overcapacity in the region was about 35% before the global recession and has worsened since.

A recent study by Alix Partners agrees. “The European automotive industry is in need of a major consolidation,” the report says. “This is absolutely essential if automotive companies want to achieve lasting stability and avoid future crisis.”

European capacity this year, including Russia, is at 27.5 million cars, Francisco Carvalho, a London-based analyst with IHS Automotive, tells Bloomberg News. However, Ford has said the region’s new-car sales may fall as low as 14.5 million vehicles this year from 2009’s 15.9 million.

But where overcapacity in Europe is a result of weak markets, in China it is the offshoot of success.

“The speedy expansion of auto makers unleashed by 2009’s 13.65 million units in total sales has exacerbated the danger of overcapacity,” says Chen Bin, head of industrial coordination at the National Development and Reform Commission.

“China’s automobile production capacity, based on a recent tally of 30 automobile groups, will far exceed the planned 31.24 million by 2015,” he is quoted as saying by the China Automobile Review. Chen also tells the Xinhua news agency excess capacity threatens sustainable economic development and must be “resolutely” stopped.

Flush with success, the China Association of Automobile Manufacturers rejects warnings that unchecked growth in the industry could harm the wider economy. The market has huge potential for restructuring, it says, predicting light-vehicle sales will grow by more than 15% annually over the coming years.

Considering the country’s vehicle sales this year are expected to hit 17 million, and given the central government’s financial support is swinging toward the development of electric vehicles, industry observers see nothing irrational about China’s exuberant growth.

Concerns of overcapacity in Russia also are being swept aside as car sales continue to climb due in part to a vehicle-scrappage program initiated in March that primarily has helped domestic auto makers and now will carry over into 2011. The move reportedly will raise the government’s total spending to RR13.5 billion ($453 million).

However, analysts say Prime Minister Vladimir Putin’s drive to reindustrialize Russia with handouts and protectionism is casting doubt on Moscow’s push to join the World Trade Organization. But Putin is unrepentant.

“I am convinced that time will show the path we have chosen – a formation of strong competitive industrial production in the auto, aviation and shipbuilding industries – is the right one,” he is quoted as saying in a speech in late September.

Russia’s new-vehicles sales soared for the seventh month in a row in September, up 55% to 185,953 units, building on a 51% surge in August to 168,627, according to Association of European Businesses automobile manufacturers committee. Deliveries in the first nine months rose 18% to top 1.3 million, with the Ford Focus the market’s best-selling locally built foreign car.

Hyundai Motor Co. Ltd. will be the latest foreign auto maker to join the market with the launch of a new plant in St. Petersburg in January that will build the Solaris, a Russian version of the Accent, targeting 105,000 cars next year and a full capacity of 150,000 in 2012.

The AEB group says it expects car sales to continue to make gains next year, citing the launch of several new models, pent-up demand, new restrictions on used-car imports and low financing rates. Russia was on its way to overtaking Germany as Europe’s leading car market before sales collapsed in 2009 as a result of the global financial crisis that sent unemployment there soaring.

Former GM executive Bo Andersson, now president and CEO of light-commercial vehicle maker OAO GAZ, agrees, telling Reuters in September he now expects vehicle sales to exceed targets this year and rise to the pre-crisis level of 3 million units in the next two to three years.

“If the sales trend continues like this,” he says, “we will be ahead of Germany, England, Italy and France.”

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