Motor vehicle production is the world’s largest manufacturing industry. But while it might be the largest in this sector, automotive manufacturers are facing an increasingly challenging business environment that includes global over-capacity, smaller profit margins, and the lack of precise and updated knowledge about consumers’ wants.

State of the U.S. Automotive Industry
In the U.S., automakers are losing billions on their core automotive operations as they are hit by rising healthcare costs for both active and retired employees. At the same time, they are steadily losing market share to foreign competitors.

Further, an article in Manufacturing.net, “Bankruptcy Concerns For Auto Suppliers Continue To Increase According to New Study,” quotes findings from a study by AlixPartners, which found that 38 percent of all auto suppliers in North America are in fiscal danger of insolvency within 24 months unless they take extreme measures. Not only relegated to North America, the study says that globally, 24 percent of suppliers face the same fate.

The study involved 104 automotive suppliers, 22 automakers, 18 heavy-vehicle producers and 32 automotive conglomerates worldwide, and measured and compared them across a wide range of financial and operating metrics.

Some findings from the study include:

• North American suppliers are trailing behind Asia and Europe in investment in research and development spending, a critical element in developing innovative products for future returns.

• Aggregate working capital efficiency for suppliers worldwide has not changed markedly since 1995.

Key Issues, Trends, and Challenges
Reuters.com cites the following as some of the key issues and trends impacting the U.S. automotive industry:

• Employee Benefit Costs: U.S. auto manufacturers bear significant costs of healthcare insurance and pensions for their current and retired employees. As insurance premiums rise, these costs will also tend to increase.

• Excess Capacity: In 2005, the North American auto industry was estimated to have excess capacity of 17%, higher than in Europe. Although demand is rising, price competition in the U.S. market remains intense, and the costs associated with this spare capacity are placing unsustainable pressure on margins.

• Fuel Costs: Gasoline prices in the US have been rising for several years, and there is growing awareness among both consumers and manufacturers that oil is a finite resource. In response, US consumers are switching their allegiance from SUVs to smaller, more fuel-efficient vehicles, and the change has been more rapid than some manufacturers predicted. Hybrids, which are potentially more fuel-efficient, remain a niche, with a 1-2% share of the US passenger car market volume, but hybrid sales are also increasing.

• Commodity Prices: Car manufacturers are particularly dependent on steel and plastics, and the prices of these commodities have been increasing in recent years, as global demand rises. Even where prices stabilized in 2006, they were often at historically high levels.

• Globalization: Domestic manufacturers are facing intense competition from foreign players, especially on price. At the same time, U.S. companies can exploit growth markets such as China.

Significant Trends
The automotive manufacturers are currently focusing on:

• Cost Reduction: Both General Motors and Ford began decreasing domestic manufacturing capacity in 2006. By 2008, between them these companies will have closed 26 North American facilities, with the loss of 60,000 jobs.

• Branding and Marketing: Manufacturers are focusing their different brands on different consumer segments, in order to differentiate their products in a crowded marketplace.

• Innovation: Industry players are investing in research & development, both to offer incremental improvements to their vehicles (such as hybrid-powered SUVs), and also to investigate more radical ideas, such as hydrogen fuel cells.

Challenges
As previously stated, the automotive industry operates in an environment with strong global competition. While new car sales have remained static for several years, the automotive manufacturers have increased the number of different models and variants of their brands. This has resulted in a decrease in the economies of scale on the production side.

Further, it is a constant challenge for automotive manufacturers and their suppliers to save costs.  The industry has to satisfy emerging demands from their customers for new and more value added services in order to retain their loyalty.

Industry Leaders
Reuters.com cites the following as some of the key issues and trends impacting the U.S. automotive industry:But even though many media and analysts paint a grim picture of the future of the automotive industry in the U.S., its manufacturers still top the lists of the global revenue leaders. According to a March 2007 industry study published by Reuters, the top 10 car and truck manufacturers (in terms of revenue) include:

1. DaimlerChrysler AG (USA)
2. General Motors Corporation
3. Toyota Motor Corporation (ADR)
4. Ford Motor Company 
5. Volkswagen AG (ADR)
6. Honda Motor Co., Ltd. (ADR)
7. Nissan Motor Co., Ltd. (ADR)
8. Fiat S.p.A. (ADR)
9. AB Volvo (ADR)
10. PACCAR Inc

To find out more about the automotive industry, visit this issue’s useful links and the detailed section outlining upcoming industry events.

Sources:
CNN Money
Manufacturing.net
Reuters.com