Preparing for the future
INSIGHT ARTICLE |
With continued job growth, strong consumer spending and low interest rates, the economic outlook for the United States looks good. Yet weaker vehicle sales and potential changes in government policy represent risks for the prospects of the automotive industry.
At the 2018 North American International Auto Show in Detroit, RSM asked Mike Jackson, executive director of strategy and research at the Original Equipment Suppliers Association (OESA), to provide his perspective on where the auto industry stands today and the outlook for the near future. The following is based on his remarks at the RSM seminar, “The Road Ahead: Innovation in Detroit and Beyond.”
The past year saw sales in the United States as a tale of two vehicles: cars and light-duty trucks. By the end of 2017, light vehicle sales surpassed 17.2 million units, yet declined 1.8 percent from 2016 levels. This overall result masks a dramatic divergence in the market, as passenger car sales fell sharply by nearly 11 percent; this was particularly true for sales of large cars, which were down about one-third, year over year. Within the truck category, cross-over vehicles posted the strongest sales gains for the year, up more than 8 percent; light-duty truck sales accounted for an increase of just over 4 percent.1 Utilities posting the highest year-over-year sales increases in 2017 included the Nissan Rogue, the Chevrolet Equinox and Toyota’s RAV4.
Speed bumps ahead
Mixed results in 2017 highlight some trends that are worth watching. On a positive note, overall transaction prices rose almost 3 percent year over year, averaging nearly $33,000 in 2017, primarily due to a richer mix of highly contented pickups and SUVs. Incentives as a percentage of MSRP averaged 11.2 percent, however, cutting into the already-thin margins of many vehicles, particularly less-profitable passenger cars.2
Retail sales accounted for 14.0 million units and outpaced the market, as volume fell just 1.1 percent from 2016. In 2017, fleet sales accounted for 18 percent of U.S. sales volume, with a sizable contribution from the lower-margin daily rental market. These vehicles have the potential to depress pricing on the new vehicle market as the rental car fleet transitions to the used vehicle auction at a steep discount. Heavy supplies of used vehicles push resale prices lower, providing many consumers added incentive to consider buying a low-mileage used vehicle at a deep 20-30 percent discount.
All of which raises a reasonable concern regarding when sales will plateau—and the prospect of an industry downturn. While forecasts vary, all reflect reasonably steady sales volumes, with a tapering over the forecast horizon. With breakeven points well below forecasts, suppliers are better positioned to ride out any mild downturn in sales and production in the near-term. Suppliers are encouraged to prepare for a more dynamic sales environment by using scenario tools to assess and plan for potential effects on their businesses.
The race for technology
Suppliers are actively assessing acquisitions (more likely for large companies in the next 12 months) and divestitures (more likely for smaller companies). Acquisitions are being driven primarily by the needs to gain technologies and access new customers. Jackson noted that all global auto manufacturers face the challenge of reallocating investments and organizational talent away from lower-margin opportunities to fund competitive and scalable portfolios in the EV/AV space. General Motors, for example, has a strategy to scale a common architecture to field a range of EV entries for global markets with volume approaching 1 million units by 2025.
The road ahead
To say that the auto industry’s fortunes are cyclical is the ultimate understatement. According to the 4Q 2017 OESA Supplier Barometer Index, the outlook of about one-quarter of top executives in the supplier industry reflected a growing optimism at the end of 2017, up from about 15 percent in the previous quarter. Nevertheless, although the percentage diminished from the previous quarter, about 40 percent still said they still are somewhat or significantly more pessimistic.
Although the OESA Supplier Barometer Index score rose six points in the fourth quarter of 2017 to a score of 46, inventories, production volumes and the political environment continue to hold sentiment down. Poor vehicle sales moved ahead of trade policy as a primary threat over the next 12 months.
Jackson said that trucks will continue to dominate launch activity for the foreseeable future. While car launches will hold steady and even increase somewhat in the next two years due to production localization, pressure will remain on OEMs to align their manufacturing footprints with demand. Suppliers must conduct a careful assessment of their book of business to proactively prepare for future changes.
Despite the uncertainties having a negative impact on some segments of the industry, responses form many supplier executive reflect growing optimism over strong business fundamentals. New investments and incremental product nameplates support tremendous stability in the market―which makes this the right time for OEMs and their suppliers to fund and prepare for the future. Flexibility and liquidity will be key to thriving in a volatile environment, and strategic plans should be crafted to mitigate the impact of any market volatility to come.
The OESA provides a unique forum for automotive suppliers to address issues of common concern, serves as a resource and is a voice for positive change in the industry. Through meetings, conferences and peer group councils, OESA offers industry executives insight into the automotive marketplace; networking opportunities with colleagues from other supplier member companies; and opportunities to develop relationships with strategic members of the OEM and supplier communities.
2J.D. Power, Power Information Network.
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