Get ready for a new era in automotive
As the automotive industry begins to recover from this deep global economic downturn, we see a new era emerging for the industry. Dr. Hans Roehm, Global Managing Partner, Manufacturing Industry, Deloitte Touche Tohmatsu, and Michelle Collins, U.S. Automotive Sector Leader, Deloitte LLP, discuss the structural changes, customer, technology, and people trends that are transforming the industry.
As we head into the 4th quarter of 2009, what's your view of the outlook for the balance of this year and into 2010?
Hans Roehm: The market’s key expectation is that the passenger car sector may achieve the sales level of 2007 no earlier than 2014-2015 – some are more skeptical, some more optimistic. However, there is a shared belief that growth rates will be seen in emerging markets while European and U.S. markets will recover much slower. In my opinion, there is a huge bias between political expectations and the actual customers’ demand.
Michelle Collins: There are an increasing number of signs that the worst could be over, but there are risks that there could be set backs to the recovery. I think the most likely scenario will be a long, slow recovery over several years. I am optimistic that industry volume will recover to mid-decades levels volumes in the 2014-15 timeframe. Here in the U.S. there is cautious optimism even though September was not a good month. I expect to see volumes in the 10 million to 11 million unit range in 2010. However, the growth engine for the industry for the foreseeable future will be in the emerging markets.
Hans Roehm: Another consideration is that, despite the industry restructuring, there is a fundamental global overcapacity that needs to be reconciled in the short term. There is a strong shift in demand to the Asia Pacific region that will drive the need to grow capacity there, while most of the rest of world will be reconciling its capacity to meet their regional demand structure.
The car scrappage programs seemed to have worked well in both Europe and the U.S., is this beginning of turnaround sales?
Michelle Collins: These scrappage programs are effective in getting consumers back into the market. The Cash for Clunkers (C4C) program in the US was helpful in driving sales in August. What was interesting was that a significant portion o f the buyers were not looking to purchase and would not have if the program had it not been implemented . However, there were definitely some pull-ahead sales as reflected by the significantly lower sales volume in September. On the plus side, I think the C4C program did rebuild some consumer confidence and spurred OEMs and the supply base to ramp up production for the 4th quarter. Despite the expected tumble in September sales, I think the industry will trend in the right direction in the coming months.
Hans Roehm: Scrappage programs are an example of a political action that was at the right place at the right time - it kept production and sales moving. The recovery is on track in Europe - keep in mind that the European market is a very diverse one. Demand varies significantly country by country: For example, in France and Germany consumption is still relatively high – however, they have been hurt by the downturn in the export market. By contrast the UK and Spain have been hit very hard by the downturn at all levels.
The Frankfurt Auto Show just wrapped up a couple of weeks ago, what trends did you think were most significant? Anything surprise you?
Hans Roehm: Exhibitors were focused on Green technology – we saw a lot of hybrids and electric vehicles on display. I could not help but notice that the visitors were still drawn to the emotional factors of vehicles – the sports cars with the powerful engines. There is a lot of political pressure for the industry to innovate the green car. It seems that the political expectation, the engineering capabilities, and the customer demand may not all be in sync. This expectation gap is going to create problems in the industry, particularly if the cost gap of purchasing a “green” vehicle versus a conventional combustion powered one does not close.
Michelle Collins: While Green technology and fuel efficiency took center stage for most automakers at the Frankfurt auto show, I think it is important that automakers not lose sight of the emotional and aesthetic appeal that must also be part of any successful vehicle. Green technologies on their own will not be enough to appeal to consumers.
What do you see as the biggest challenge facing the industry over the next 18-24 months?
Michelle Collins: There are a couple of key things that OEM and suppliers need to face up to - it’s about survival right now. What does that mean? It’s having cars that people can afford and are willing to buy. So being connected with the marketplace and staying flexible to match production to demand is essential. Holding on to the customers you have and maintaining market share is going to be vitally important. Maintaining customer loyalty is going to be critical to this effort. Ultimately the next 18-24 months are going to be about managing your cash while continuing to fund future product pipeline.
Hans Roehm: Given all the government mandates on carbon and emissions, automakers are going to need 100 billion Euros for research and development (R&D) over the next 4 to 5 years. This is a huge challenge with lower sales volumes occurring at the same time. Therefore, OEMs need to vehemently focus on organizing their production to meet regional tastes to retain customers.
Michelle Collins: Another critical factor over next year and half will be the state of the supply base. OEMs will need to consider if they have done a rigorous enough job of assessing their supply base. It is very likely that major restructuring will continue. Can your supplier base meet your current and future needs?
Hans Roehm: Since demand structure in China will be totally different from demand structure in the U.S. or Germany, a key factor will be to manage production from a global perspective, but adapt re- selling to the individual market.
What do you think the factors are going to be that will separate the winners from the losers as the industry recovers?
Hans Roehm: In terms of the future competition, there will be a significant change. For example, China is focusing its R&D spending on the electric engine, and leaving the internal combustion engine innovation to the other market players. Chinese OEMs think they can not compete improving the internal combustion engine, so their strategy is focusing on the electric car and pushing it successfully into the global market.
Michelle Collins: We are seeing OEM and suppliers spread their R&D investment across many different technologies. They seem to be hedging their bet against multiple potential future scenarios with regard to powertrain options. Given the limited resources, eventually they are going to have to choose a technology as their winner. However, regardless of the technology that is chosen, the vehicle is more than the powertrain. The clean technology must be balanced with all the other customer needs such as space, drivability, range and styling.
Hans Roehm: Investment in new clean technologies is needed. But these are going to be too large for many OEMs and suppliers to develop on their own. Therefore, I think you will continue to see the trend toward development partnerships and collaborative arrangement. However, I firmly believe that there is still a lot of potential for improvements of the internal combustion engine, which will continue be the dominant powertrain well into the future.
The supply base has been surprisingly resilient through the crisis; do you still see major restructuring in the future?
Michelle Collins: I think everyone has been surprised at the resiliency of suppliers during the past year. We all expected to see more bankruptcies, but so far the supply base is hanging in there. We also expected a bit more consolidation. However, the remaining supply base has really slimmed down their costs and have become as lean as they can be. This doesn’t mean we are done with the consolidation, but there was less of a big bang effect than we expected.
Hans Roehm: I agree with Michelle that the restructuring and consolidation will continue. It is interesting that consolidation is generally not going to be the result of bankruptcy, but more a strategic choice where the remaining suppliers will strengthen their portfolios by redefining themselves and moving to other sectors or focusing on core product lines.
Michelle Collins: There is huge innovation going on and it is redefining the industry. OEMs are going to be looking to the supply base for innovation to meet environmental and competitive challenges that they face.
Has the economic crisis changed consumer buying preferences permanently?
Hans Roehm: In recessions there is a temporary reduction in demand even from people who can buy cars. Luxury cars will bounce back. As far as consumer preferences, safety remains a top concern. Technology is another attribute affecting buying decisions. Even during a crisis, consumers do not want to sacrifice the attributes they desire in a vehicle.
Michelle Collins: Our research indicates that we have entered into an era of “conscious consumption”. Customers, not just in the U.S., but in most of the world market will be more cost conscience. The global recession will have a lasting impact on those who lived through it. Over the last several months I have heard from some of the Gen Yers that I work with that they can’t afford the same car that they currently have. This is a dramatic change from just a few years ago when the assumptions was you could at least trade your older model in for a new version for comparable price, but this is no longer the case. It is sign of the times but it represents an opportunity for auto manufacturers to re-introduce themselves to consumers who will need to fulfill their vehicle needs with something else.
What will the market look like in 2015? How “electric” will it be?
Hans Roehm: There will be volumes but it may be much less than expected. The infrastructure to support even a modest market share will not be in place. I also expect that the high price will limit demand further.
Michelle Collins: I think electric and hybrid vehicles will occupy a substantial portion of the market in the coming decade. The demand for hybrids will be driven by stricter government regulation of fuel economy and carbon dioxide emissions in the United States and Europe. However, the infrastructure environment will be the biggest challenge. Is there recharging available? Is it affordable? Is it a leased battery? Do you buy it? How expensive? While EVs have the inherit benefit of zero emissions, until there is major technological breakthrough on batteries, issues such as range, lack of recharge infrastructure and cost will continue to limit their mainstream acceptance.
We are seeing a major restructuring going on in the industry. What will be some of the significant new features of the industry?
Hans Roehm: A lot of young talent is re-considering the engineering career. They are not willing to become engineers anymore, mostly because of being in an unsafe industry. Germany for example is lacking about 20 percent of engineers each year. We have to change this. Green future engineering innovation can help to make this happen. I see this problem especially in Australia, US, and Europe and less in Asian countries.
Michelle Collins: Even if people are looking at becoming an engineer, it’s not likely in the car industry. Over last 10 years the industry globally has developed a poor reputation as an old, behind the times place to work. Hopefully this new era that is emerging for industry will be perceived as a more positive, one where the industry will be viewed as a leader in innovation and a place for the best and brightest to work.
Profile: Hans Roehm
Profile: Michelle Collins