Where is the Auto Industry Heading?

Ashok is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The automotive industry has moved at a pretty rapid pace from the first petrol engine built by Karl Benz in 1885, to the latest Acura ILX/RLX by Honda. The evolution in this industry has been influenced by many factors at different times, which include innovations in fuels, manufacturing techniques, market demand, vehicle components, and economic condition. Currently the demand is for a greener and a cleaner environment, which is why todays mantra for all the auto makers is ‘Hybrid Technology’.

Let us do a Porter’s Five Force industry analysis to understand the basics of this industry before intriguing each company in detail.

<img src="/media/images/user_14653/porters-five-force_large.JPG" />

This analysis reveals that the entry factor is quite high, and thus our focus would be on the key existing players. The U.S. auto industry has seen many ups and downs. Let us take a look into the overall monthly sales figures of the last 10 years.

<img src="/media/images/user_14653/ashok_3_large.JPG" />

*Source: http://www.motorintelligence.com

The figure depicts how the auto industry is slowly recovering from the turmoil of the recession, where the sales figure took a massive dip.  There are many players in this industry, but we will speak about a few of the most important ones and how they have fared in the recent past.

<img src="/media/images/user_14653/us-top-5-market-share_large.JPG" />

Source: http://online.wsj.com

General Motors (NYSE: GM) was one of the biggest victims of the recession in 2009. They had started to anticipate this as early as in 2005, and thus had reduced expected earnings by almost 50%. But after taking a bailout from the government they did not take things for granted; rather they became much more aggressive in all business frontiers. This was clearly visible in the sales figures of 2011, when they dominated the entire market. The brand of GM comes with a huge trust facto,r especially Chevrolet. Chevrolet Silverado PU (its top selling vehicle in U.S. ), along with Chevrolet Equinox and Cruze, are its major performers. This shows the brand value of Chevrolet in the market, while on the other hand it also exposes the over-dependence of GM on Chevrolet.

Ford (NYSE: F) has been one of the steady performers in the market. Where other players have been going through various swings, they have displayed a very steady performance, tackling their problems in a very smart way. Its F-series PU (Pick Up truck) has been the leader (considering individual cars) in the U.S. market, with a sales figure of 520,320 until Oct 2012, an increase of 10.9%. But they are probably regretting the decision to spin off Jaguar & Land Rover (sometime in 2009) at a much cheaper price than bought, to combat the financial crisis.

Toyota (NYSE: TM), with its innovative production strategy and superior product designs, are slowly gaining back the control of the lost market. The production halt created by the tsunami in Japan is fading away quickly with impressive quarterly results in which profits almost tripled, surpassing the expectations of the market. They might not be leading the market if we consider individual car sales, but they have displayed the highest growth rate in 2012, showing how much faith they have from their customers.

<img height="129" src="/media/images/user_14653/ashok_4_large.JPG" width="652" />

Honda (NYSE: HMC), the second Japanese company to impact the U.S. auto market, has also seen some improvement in the current quarter. They have had strong sales of new models, as well as a strong recovery from the supply chain disruption caused by the earthquake last year, which has contributed to a significant increase in profit in Japan and North America. Honda's Accord sales saw an increase of 35.7% to date since 2011.

Tata Motor (NYSE: TTM) is one of the rare auto companies that has a very high risk appetite. They purchased Jaguar & Land Rover against all odds. At that point of time they did not had the required finances, the recession had already made a huge blow, demand was declining, and the operating margin was very unattractive. But they went ahead with the purchase and proved all the analysts wrong by doing a turnaround of the company. They improved the operational efficiency, rebuilt the demand, and targeted the right market. Its Evoque currently has the highest demand growth rate in the European market, which is expected to soon spread to the other countries as well. In the U.S. market, currently, they are the underdogs who are just waiting for the right opportunity to snatch the deal from its competitors.

Daimler, a German automotive that merged with Chrysler in 1998, is not performing so well of late. This is one of the best examples of an inappropriate merger. Due to Daimler's reluctance to allow Chrysler to continue development and use quality materials, Chrysler vehicles suffered lower fit and finish quality, as well as sub-standard parts being supplied and used in spite of concerns. This led to the spin off of Chrysler to the Italian company Fiat, who has taken a leaf out of the mistakes of Daimler and is integrating Chrysler's products into Fiat’s portfolio. This is the reason Dodge Ram of Chrysler has gained market share, with sales increasing by 20% over 2011.

What is the Road Ahead?

The impressive figures of 2012 might not continue in the coming days. Despite the massive improvement in the sales and a decline in bad debt, the auto makers are concerned about the future. A lot of factors could possibly affect the sales growth in 2013, which all the major auto makers are keeping a check on.

  1. Increasing Consumer Debt: The best way to afford such expensive vehicles these days has been through debt. But the latest data revealed that there is a continuing pressure of increasing debt, which is expected to reach its saturation soon.
  2. Fluctuating Fuel Prices: The increasing fuel prices were a big concern for the auto makers in 2009 when it was at its all time high of $3.91. Currently they are working towards finding alternative measures for fuel, like hybrid cars.
  3. Changes in Consumer Preference: Consumers these days are shifting rapidly from the large passenger vehicles towards fuel efficient small vehicles, SUVs, and dual-cab pickups. They are also starting to prefer the hybrid cars more than the gasoline because of a conscious approach to save our environment.
  4. Stiff Competition from Used Car segments:  The used car dealers are selling vehicles below the recommended price in order to gain a higher market share. If they get more aggressive then it will affect overall sales of the new cars in the coming years.


The automotive industry has made a decent comeback in 2012. But the road for 2013 looks to be on the tougher side, as predictions say that sales growth might not match up with the figures of 2012. The automakers need to be on their toes all the time, as the market is very competitive, and a small mistake could lead them into serious troubles. On the other hand, how they manage to keep the prices down along with reducing the operational cost is a daunting task in front of all the key players. Currently Toyota, Ford, and General Motors are leading examples of how to keep their head strong even in the tough times. But can they continue to enjoy this dominance with the pressure building up from Chrysler, Honda, and Volkswagen?

ashokkp has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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