2013 Strategy&/Bloomberg U.S. automotive industry survey and confidence index
Brian Collie and Scott Corwin

A survey of more than 200 executives from more than 75 automobile manufacturers, suppliers, and dealers finds that surging sales and record profitability have lifted confidence to new highs. At the same time, however, it is clear that the tailwinds of recent years are starting to ebb, setting the stage for future competitive battles.



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2013 Strategy&/Bloomberg U.S. automotive industry survey and confidence index

Automotive contacts

Media contact

Cleveland Arjun Kakkar Principal +1-216-925-4027 arjun.kakkar @strategyand.pwc.com

Florham Park Marian Mueller Partner +1-973-410-7659 marian.mueller @strategyand.pwc.com

New York Katrina Grochocki Marketing Manager, North America +1-212-551-6415 katrina.grochocki @strategyand.pwc.com

This report was originally published as “2013 Booz & Company/Bloomberg U.S. Automotive Industry Survey and Confidence Index” by Booz & Company in 2013.
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Executive summary

Surging sales and record profitability have lifted confidence among U.S. auto industry executives to new highs. At the same time, however, it is clear that the tailwinds of recent years are starting to ebb, setting the stage for future competitive battles. Executives expect a struggle for market share to test the industry’s focus on the fundamentals and a return to operational and financial discipline. These are the headlines from the 2013 U.S. Automotive Industry Survey and Confidence Index. The survey is an annual study by Strategy& and Bloomberg LP that examines the current state of the auto industry, the attitudes of auto executives, key challenges facing the industry, and, most importantly, what executives are doing in response to those challenges. During July and August, more than 200 executives from more than 75 automobile manufacturers, suppliers, and dealers took the online survey. A majority of the respondents were vice president or above.

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Key findings
• This is a great time for the automotive industry; more than 90 percent of respondents call industry conditions either somewhat better or much better than they were a year ago. More than 85 percent expect profitable growth to continue through 2014. • Optimism is tempered by the expectation that growth in demand will flatten out in 2014–16, as the boost in vehicle replacements (replacements deferred by consumers during the recession) declines and growth rates return to levels in line with GDP expansion. Survey respondents expect overall vehicle sales growth of 1.4 percent from 2013 to 2017, well off the 10.1 percent pace of 2010–13. Their prediction of 16.3 million vehicle sales in 2017 is lower than most industry forecasts. • Slower growth could intensify industry competition. Forty percent of auto executives predict more aggressive use of incentives; of these, 46 percent expect OEMs to “break ranks” on incentives before the end of 2013. • Respondents see Hyundai, Volkswagen, BMW, and Ford continuing to gain market share, whereas they predict small market share losses for GM, and larger losses for Subaru and Nissan. Notably, the level of respondents’ confidence in their own predictions is significantly lower than it was last year, suggesting that velocity of gains and losses is slowing down. • Expectations for the adoption rates of alternative powertrains are down slightly from last year. Respondents predict cars powered by electricity, natural gas, and other alternative power sources will represent 20 percent of total vehicle sales by 2020, down from a prediction of 24 percent in last year’s survey. More than 50 percent see government support as critical to alternative powertrain adoption; predictions of the 2020 penetration rate drop to 12 percent in a scenario without government support. • OEM respondents are confident in the industry’s offerings in the emerging fields of in-vehicle entertainment, telematics, and the “connected car.” Some 70 percent say they have compelling value propositions relative to offerings from smartphone makers, wireless carriers, and app developers. Tellingly, however, more than half admit they don’t yet have integrated solutions in this area. Last year, 38 percent of OEM respondents said they intended to create their own platform for integrating digitization and connectivity.

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Fundamentals lift confidence

More than 90 percent of respondents call industry conditions either somewhat better or much better than they were a year ago (see Exhibit 1). The exuberance among U.S. auto executives is well-founded. Yearover-year sales rose 17 percent in August, putting the industry on an annualized pace of 16.1 million vehicles, a level not seen since before the recession started. Profits from North American operations are hitting record levels thanks to a number of successful product launches, streamlined operations, rationalized cost structures, and more disciplined pricing. Survey respondents credit the resurgence to a return to fundamentals that began when the recession forced most companies to restructure and others to retrench. OEMs have refreshed their product portfolios

Exhibit 1 Survey participants are highly positive about the current state of the industry
63% 55%

34%

33%

12% 3% About the same or worse Somewhat better Much better Source: 2013 U.S. Automotive Industry Survey and Confidence Index OEM Supplier

Perceived state of the industry today Compared with one year ago

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and brought attractive new vehicles to market. They’ve adjusted and maintained capacity to be more in line with demand, enabling them to operate profitably at lower levels of sales. And they’ve maintained operating and financial discipline. After decades in which bloated manufacturing footprints forced automakers to churn out more cars than consumers wanted, today, fewer than 20 percent of survey respondents say they have excess capacity. More than 90 percent say they’re “maintaining strong pricing discipline,” and suppliers say they’re using price only as an opportunistic tool to win key programs. These factors inspire short-term confidence: Large majorities of both OEMs and suppliers predict profitable revenue growth through 2014 (see Exhibit 2). OEMs’ optimism stems from the strength of their current products and their product pipelines. Suppliers, meanwhile, cite their cost structures and aligning with the right vehicle manufacturers as sources of ongoing strength.

Exhibit 2 There is a high degree of confidence regarding growth in the coming year
57% 54%

33%

29%

6%

5%

7%

10% OEM Supplier Confident Very confident

Not confident

Uncertain

Expectation for profitable revenue growth through 2014

Source: 2013 U.S. Automotive Industry Survey and Confidence Index

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Slower growth ahead

For all their ebullience over current conditions, survey respondents seem to recognize that double-digit growth is simply not sustainable in a mature market and that growth in new demand will flatten in the coming years. They predict total U.S. vehicle sales of 16.3 million in 2017, lower than recent industry forecasts of 16.7 million to 16.8 million units. Respondents seem to understand that the rapid rise in sales following the most recent recession reflected pent-up demand from consumers who had retained aging cars through the downturn. As those newer vehicles are in turn replaced, industry executives expect auto sales growth to track more closely with overall GDP growth (see Exhibit 3). Executives expect to feel the top-line impact soon; most forecast a return to single-digit sales growth in 2013. Forty-two percent of both OEMs and suppliers anticipate sales growth of just 1 percent to 5 percent this year.

Exhibit 3 Over the next few years, executives expect growth to slow, returning to levels more consistent with those of a mature market
Units (Millions) 17 16 15 14 13 12 0 2010 11.6 2011 2012 2013 2014 2015 2016 2017 12.8 10.1% 14.5 16.1 15.6 15.5 15.9 1.4% 16.4 16.4 16.0 16.7 16.6 16.8 16.7 16.3

Forecast
2013 LMC 2013 IHS 2013 U.S. auto survey

U.S. light vehicle sales Actual and forecasted (2010–17)

Source: 2013 U.S. Automotive Industry Survey and Confidence Index

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Competition heats up

A slowdown in growth signals a return to more-intense competition, compounded by the efforts of foreign automakers to expand their U.S. market share, and stonger, more focused suppliers. Companies seeking to sustain revenue and profit growth in this more competitive, zero-sum environment will have to win sales from rivals. Survey respondents clearly worry this shift will bring an end to the period that automakers have enjoyed as a rising economic tide buoyed all competitors. During this period, few felt the need to strive for more than their fair share of a rapidly growing market by offering more attractively priced vehicles. The rampant discounting and overly generous incentives that damaged profits during the downturn largely disappeared. Automakers shed excess capacity, enabling them to more closely align production with actual market demand. But as competition now heats up, the temptation to undercut rivals on price will grow. Some 40 percent of survey respondents predict the pricing discipline that has bolstered profit margins in the last few years will soon begin to crumble (see Exhibit 4, next page). In terms of market share among vehicle manufacturers, survey respondents see Hyundai/Kia and VW/Audi as the two OEMs most likely to gain share over the next five years. Next come Ford and BMW/ Mini Cooper; about 40 percent of respondents predict market share gains for each. Respondents are less bullish on Subaru, Mercedes, and Nissan/Infiniti, with less than 20 percent forecasting market-share growth for those brands over the next five years (see Exhibit 5, next page). Interestingly, the percentage predicting gains for Hyundai and VW, as well as the percentage predicting losses for GM and Nissan, declined from last year.

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Exhibit 4 Executives expect some OEMs to increase their use of incentives
46% 43% 23% 23% 30%

2012

2013

They already have

Fall

Winter

% of respondents forecasting “more aggressive use of incentives”

Timing of when OEMS are expected to break ranks on incentives
Source: 2013 U.S. Automotive Industry Survey and Confidence Index

Exhibit 5 Hyundai/Kia, Volkswagen/Audi, and Ford are projected to gain share in the coming years
100% 32% 19% 17% 39% 62% 40% 21% Subaru 21% Honda/ Acura 28% 17% 30% 37% 41% BMW/ Mini 43% Ford 60% 63% 11% 48% 49% 8% 33% 7% 12% 26%

56%

67%

43%

52%

13% Nissan/ Infiniti

14% Mercedes

29% General Motors

31% Toyota/ Lexus/ Scion

33% Chrysler/ Dodge/ Fiat

Lose Share Maintain Share Gain Share

Volkswagen/ Hyundai/ Audi Kia

Forecasted change in shares over next 5 years All respondents
Source: 2013 U.S. Automotive Industry Survey and Confidence Index

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Ready to compete

Respondents across the board feel reasonably well prepared for an uptick in competition. Sizable majorities of both OEMs and suppliers say they are at par with or advantaged over key competitors. But a far larger share of OEMs — 52 percent — say they have a competitive advantage. Only 31 percent of suppliers say the same. OEM executives attribute their competitive edge to several factors: stronger product portfolios and robust pipelines, a solid financial position, healthy brands, and effective sales and marketing capabilities. They’re less confident in their R&D and engineering capabilities, and the customer experience they provide. Suppliers point to strength in products, innovation pipelines, cost levels, and financial position. But they worry about application engineering and their ability to manage change at the OEMs (see Exhibit 6, next page). Clearly, not everyone can win in a slower-growth environment. There is a question as to whether their optimism will lead to more aggressive behavior, which could impact the overall industry health. Most respondents also feel strategically ready for the road ahead. More than three-quarters of OEMs and suppliers say their companies have strong, coherent, and well-articulated growth strategies. They say critical success factors are well understood across their organizations, and investments are flowing to those strategic priorities. Similar numbers believe they are well positioned in key geographic markets and product segments.

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Exhibit 6 Executives are confident regarding their companies’ innovation, product portfolio, and financial position
OEMs
88% 88% 88% 87% 85% 90% 96% 86% 80% 80% 70% 53% 48%

Suppliers

80%

79%

At par Advantaged Brand/sales & marketing Current product portfolio Current product portfolio Brand/sales & marketing Retail network Customer base & relationships Application eng/change mgmt Customer experience Financial position Engineering/R&D Innovation/product pipeline Financial position Innovation/product pipeline Cost position Cost position

Assessment of own company performance relative to key competitors % of respondents noting as at par or advantaged
Source: 2013 U.S. Automotive Industry Survey and Confidence Index

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Doubts about alternative powertrains, confidence on CAFE

Executives are becoming less confident in the outlook for alternative powertrains. The predicted level of penetration by 2020 has dropped since last year’s survey, to 20 percent of total vehicle sales, from 24 percent. The predicted level falls to 12 percent in the absence of government support (see Exhibit 7 ). Confidence in advanced diesel technologies, by contrast, is rising. Nearly 70 percent of respondents say they’re more confident about advanced diesel than they were at the same time last year. Electric vehicles powered by batteries or fuel cells draw the most skepticism: More than half of respondents say they are less confident than they were a year ago about the long-term prospects of those technologies (see Exhibit 8, next page). Respondents see fuel prices and government incentives as the top

Exhibit 7 Executives are still bullish on alternative powertrains, but less so than last year
24% 20% 17% 12% 7%

Current penetration 2012 Penetration

2012 survey

2013 survey

2012 survey

2013 survey

2020 penetration With gov’t support

2020 penetration Without gov’t support

Forecasted penetration of alternative powertrains (all but conventional IC engines)

Source: 2013 U.S. Automotive Industry Survey and Confidence Index

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factors motivating consumers to choose alternative powertrains. Major obstacles to consumer adoption are the limited driving range of some technologies, the total cost of ownership, and the lack of recharging/ refueling infrastructure. These limitations are most relevant to allelectric and natural-gas vehicles, which explains respondents’ skepticism about the near-term viability of those technologies. Questions about new “green” technologies haven’t dimmed respondents’ confidence in their ability to meet new clean-air standards that take effect in 2020. More than 80 percent say they’re confident or very confident that they’ll meet the 2016 CAFE standards, and 43 percent say they’re “very confident.” Survey responses underscore the continuing importance of redesigning traditional powertrains to meet tighter emissions standards. A large majority of respondents expect improvements in internal combustion engine technology to play a major role in generating the fuel efficiency needed to comply with new CAFE standards. Nearly as many cite partial hybrids as key elements of their CAFE compliance strategies. And more than a third expect new lightweight materials to play a role in their compliance efforts.

Exhibit 8 Regarding alternative powertrains, participants are more confident about advanced diesel and hybrids than electric vehicles
Fuel-cell electric -42 Battery electric Natural gas Plug-in hybrid Mild hybrid Full hybrid Advanced diesel tech -36 -14 -9 14 31 59 Less confident Neutral More confident

Current confidence in long-term prospects of alternative powertrains vs. last year % of respondents who are “more confident” net of those who are “less confident”
Source: 2013 U.S. Automotive Industry Survey and Confidence Index

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Connected car conundrum

Consumers are embracing a range of new digital technologies for the automobile, including onboard infotainment, wireless communications, and telematics. Automakers, on the other hand, are still figuring out their strategies for the burgeoning digital arena. A critical choice for OEMs is whether to create their own proprietary digital systems or simply make their vehicles compatible with a range of popular consumer devices. The major challenge is creating a comprehensive, fully integrated, digital in-vehicle and ownership experience for customers. Some 70 percent of respondents believe their telematics solutions are on par with those available from wireless carriers, smartphone makers, and application developers. Most consider themselves leaders in infotainment services, which differentiate their vehicles in the market. Most also express confidence in their network of partners and content providers for telematics devices (see Exhibit 9, next page). But less than half say they offer a fully integrated product set, or an integrated telematics solution for various digital devices. Many OEMs are trying to create their own platforms for digitization and connectivity — which is understandable as they seek to recoup embedded hardware costs and monetize the value of a captive audience through new streams of service revenue. But it runs counter to consumers’ desire to choose their own devices and consume media anytime, anywhere across multiple platforms. A single proprietarytechnology platform isn’t likely to appeal to multi-driver families. Furthermore, development of such technologies will be difficult for an industry that tends to move more slowly than consumer electronics. Automakers will be hard-pressed to match the innovation capabilities of device makers and wireless service providers who are accustomed to faster cycle times and rapidly shifting consumer tastes.

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Technology-agnostic systems that allow each driver to use his or her preferred devices in the car may be the better solution for automakers. Settling on an approach is an important near-term frontier for automakers, and critical as a foundation over the longer term for autonomous driving vehicles as well.

Exhibit 9 OEMs are bullish regarding their proprietary telematics
70%

43%

46%

35% 26% 11% Somewhat agree Strongly agree

Our company has a clear value proposition for in-vehicle telematics vs. potential third-party alternatives and substitutes

Our company has an integrated set of products and services for our customers Source: 2013 U.S. Automotive Industry Survey and Confidence Index

Value proposition for in-vehicle telematics

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Costs, complexity, and consolidation

Costs are still in the cross-hairs. Despite their massive efforts to shed excess capacity, reduce legacy obligations, and streamline operations, auto executives believe they still have significant opportunities to continue cutting costs. Fully 80 percent say cost reduction remains a top priority for their companies. This suggests companies view cost cutting as an ongoing effort at continuous improvement, rather than as a one-time event. Still, respondents betray some ambivalence about their company’s cost reduction efforts. Most say cost cuts align with corporate strategy, and haven’t gone too deep in critical areas. On the other hand, nearly 40 percent of respondents say that cost-reduction efforts are not creating a competitive advantage (see Exhibit 10, next page). Respondents see the greatest opportunity for cost savings in product development and sourcing. Concerns about complexity. The increasing complexity of automotive organizations worries many survey respondents. Fully 80 percent fear profitability will suffer if their companies don’t manage complexity better. At the same time, nearly half of respondents don’t think their companies fully understand the cost of complexity. And a solid majority would like to see more standardization among manufacturing plants and processes. Suppliers see consolidation coming. More than 60 percent of suppliers expect consolidation in the industry segments they serve. And 68 percent say their companies are actively pursuing acquisitions. The top goals of acquirers are expanding into new geographic regions and product lines, increasing scale, and enhancing capabilities. Suppliers edging up against capacity limits must weigh pressure to expand against the risks of doing so when industry growth is expected to slow.

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Exhibit 10 Cost reduction remains a priority for leadership teams
80%

36% 39%

44%

30% Somewhat agree Strongly agree

9%

Cost reduction is a major priority for senior leadership

Cost-reduction efforts are not creating competitive advantage Source: 2013 U.S. Automotive Industry Survey and Confidence Index

Cost reduction priority and results

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Conclusion

The Strategy&/Bloomberg survey shows both OEM and supplier auto industry leaders are reaping the benefits of their restructuring during this period of recovery, without kidding themselves about the future. Companies are reaping the benefits of cost optimization, pricing discipline, and a post-recessionary wave of pent-up demand, while recognizing that double-digit growth in sales, as we have seen the past few years, is simply not sustainable. As industry growth returns to historical averages, essentially keeping pace with GDP expansion, and with stronger and more capable OEMs and suppliers, winning will get that much harder. This year’s study and conversations with industry executives suggest a few key imperatives for OEMs and suppliers in the coming year. OEMs will need to keep up their levels of investment in areas critical for future growth and must maintain a concerted approach to cost optimization. OEMs will need to continuously reduce direct material, operating, and SG&A costs, to free up capital that can be used to accelerate growth. This includes continuing to invest in bringing new vehicles to market with advanced technologies and powertrain innovations that excite consumers. In the near term, the connected car will be a priority; in the medium and long term, autonomous driving capabilities will be a key focus. This is a global industry, and OEMs will also have to maintain their investments in emerging markets even if the payoff is not immediate, because these markets provide platforms for sizable future growth. The OEMs that execute well against this game plan will be the winners of the future. Suppliers, too, will need to make clear choices on where and how to compete in the future. With stronger and more focused competitors, increasingly demanding customers, and the need for continuous product and process innovation, suppliers can no longer try to be everything to everyone. Suppliers must focus, narrowing in on those products and segments where they have a clear right to win and apply investments, capability building, and management attention to driving step change improvement in these areas relative to competitors.
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Four key imperatives for suppliers in the coming year include: 1) focusing the business portfolio on those markets and customers where they have a clear right to win; 2) developing a much deeper understanding of the fundamental economics for competing and winning in prioritized products and segments — whether in scale, complexity, labor, technology, etc — and accelerating efforts to transform the supply chain into a source of competitive advantage; 3) improving the pace and impact of innovation, so that suppliers can win with new products, and price accordingly; and 4) investing in more advanced talent acquisition and development capabilities so that suppliers can better differentiate through talent.

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This report was originally published as “2013 Booz & Company/Bloomberg U.S. Automotive Industry Survey and Confidence Index” by Booz & Company in 2013.

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© 2013 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Disclaimer: This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

 

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© 2014 PwC. All rights reserved.
PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.