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Booz Survey Identifies Key Forces Shaping Automotive Industry's Future

In May 2011, John McElroy - the renowned Emmy-award-winning automotive journalist - spoke to 100 manufacturers and engineers, who were attending an event focused on laser technology, about the U.S. auto market's return to positive growth in an economy that is still recovering from recession: "Despite the woes you hear, the meltdown and uncertainty, the auto industry in the United States - and globally - is doing pretty well right now," he noted. "For whatever reason, sales are decent in the `New Normal,' but nowhere near where they were four years ago. However, Detroit automakers are now profiting due to restructuring. They closed a lot of factories due to the 2008 sales collapse when the credit markets closed. But now, with more competitive labor agreements, it makes sense for them to build more in the United States, retool and refurbish existing plants, and in-source work now that labor rates are under control."

McElroy's statement is confirmed by a recent study from Booz & Company - "Optimism Returns to American Automotive Industry" - which concludes that the U.S. auto industry is positioned for global economic recovery. Booz surveyed more than 200 senior executives at 75 vehicle manufacturers and suppliers who are much more optimistic than they were a year ago.

Better Aligning Supply & Demand
What's behind this optimism? For one thing, car sales are climbing, estimated to register 14 million this year - up 9 percent over 2011 figures. It's true that this is down from 17 million annually just a few years ago, but manufacturers believe that by better aligning supply and demand they can realize more profitable sales.

In fact, 65 percent of the respondents cited the auto industry's restructuring as one of the key drivers of strong performance. Better product offerings are also contributing to industry growth, with new vehicle launches offering higher levels of performance, safety, and fuel efficiency. Moreover, the gap between domestically produced vehicles and imports has narrowed considerably in this regard.

Today the average U.S. car is more than 10 years old and has been driven more than 100,000 miles. With consumer confidence and fuel prices rising, many are now deciding to replace that old vehicle with a more fuel-efficient model. And automakers are attempting to build brand equity with these consumers by improving their buying experience and competing globally. The new approach involves fewer, but more profitable sales, allowing automakers to maintain low inventories.

Key insights from Booz & Company's U.S. Automotive Industry Survey and Confidence Index released on May 22, 2012.

Suppliers are also working to leverage relationships with manufacturers and stretch existing production capacity. A survey by the Original Equipment Suppliers Association found that 76 percent planned to run overtime shifts in the first quarter of 2012, although more than half were constrained by capacity. However, analysts believe they can only postpone new capital investments in fixed assets for so long.

Four Key Forces for the Future
The Booz survey also reveals four key forces that will shape the U.S. auto industry in the near term:

  • A re-emergence of fundamentals allowing for more efficient use of production capacity to generate profit at lower volumes

  • A shift in demand centers with emerging markets having stronger growth prospects

  • Uncertainties about alternative powertrains - including electric vehicles, fuel cells, and hybrids - and other technologies, including the level of government support they will receive

  • An increasingly interconnected supply chain that will force the industry to be better prepared for global disruptions caused by unpredictable catastrophic events such as that the Japanese tsunami in 2011

Analysts further believe that if the U.S. auto industry can stay disciplined and preserve the efficiencies it has implemented, it will produce higher-quality vehicles at greater profits and remain globally competitive. It's true that challenges still lie ahead, but as J. Scot Sharland, executive director of the Automotive Industry Action Group (AIAG), recently noted, "Many companies had compressed their production and tried to maintain some level of profitability, and now we are collectively struggling to manage robust demand. That is a much better problem to have than the precipitous drop we have worked so hard to survive."

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